Why Anti-Money-Laundering Rules are Making International Investing Harder

David KuenziMay 10, 2018

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Anti-money-laundering rules have become stricter since 9/11, in order to stop terrorism at the financial level. How does AML (anti-money-laundering) legislation affect international investors?

David Kuenzi, a certified financial planner with Thun Financial, explains why AML legislation has made opening an American brokerage account from overseas difficult. David clarifies how the Patriot Act has changed the way financial institutions do business with American citizens residing in foreign countries. While it is not illegal for an expatriate to have a financial account in the U.S., a financial institution’s perspective is much more complicated than the legality of the account.

David and Doug advise how to find a cross-border advisor who can address your needs.

Are you an American citizen living abroad?

Doug has a checklist for American expatriates living in a foreign country. If you’re moving to a foreign country, learn how to keep your U.S. Ira and brokerage accounts open after you move. Download this free resource here.

In this follow-up interview, David Kuenzi, a Certified Financial Planner specializing in cross-border tax issues, expounds on U.S. investment accounts for people living outside the United States as well as the rules and regulations and challenges involved.

Douglas Goldstein: I am very excited to have back on TheGoldstein on Gelt Show David Kuenzi, who is a Certified Financial Planner like I am. He also specializes in cross-border investing, dealing with people who live outside the United States and who have U.S. brokerage or IRA accounts.

David, I want to focus today on one of the issues I think you and I probably look at every day. Why is it so difficult for anyone who lives outside the United States, including Americans, to have or maintain U.S. investments accounts?

Challenges in Maintaining U.S. Investment Accounts outside the United States

David Kuenzi: This is a great topic, and we talk a lot about this. This has become a huge and, quite honestly, a painful issue for a lot of Americans abroad who are finding that their access to financial services, not only in the country in which they live but also in the United States now, increasingly are being curtailed because of regulations.

This story goes back probably a long way, and it has evolved over the last decade. It really started with the Patriot Act of 2001, which your listeners are probably familiar with. Of course, this was in response to 9/11. The U.S. government decided they needed to really ramp up the rules for cross-border transactions, which they thought might be resulting in the illicit funding of terrorism.

One of the consequences of that legislation were some rules that seemed to imply that U.S. financial institutions had an extremely high barrier in terms of KYC (Know Your Client), as it’s known, established for them. Many of them were of the opinion that it is so difficult to verify the identity of someone who has an account outside the United States that you can’t limit that standard. That started an evolution of process whereby a lot of Americans started losing their financial services if they did not have a U.S. address.

Douglas Goldstein: You're right. What I thought was crazy about that also, just sort of the fundamentals of it, was you were talking about Americans who have U.S. passports and who, for whatever reason, were assigned overseas or they chose to move overseas.

All of a sudden, they get marked as potential money launderers, which is good compared to what else you could be marked as—like a terrorist, or someone supporting that. But it just seems to me as though the U.S. regulations swung so hard that it was damaging the wrong people, because the bad guys can always move money in euros, right?

David Kuenzi: Absolutely. Of course, the people that the laws were intended to target probably did face some restrictions in their ability to do what they were doing. But one of the unintended consequences, as happens so often in these cases, was it affected a whole swath of people that were never intended to be restricted in any way. You know, typical Americans abroad, whether they're in Israel or in Europe or in Asia.

But they, of course, fell under these rules and were subject to really strict new guidance from the U.S. financial institutions that previously served them, whether or not they could continue to work with them. It wasn’t just the Patriot Act; it evolved over time. You had an increase in other kinds of really strict anti-money laundering rules in 2010, which led to another wave of U.S. institutions closing down accounts of Americans abroad.

Then, in just the last couple of years, there's been a whole other new series of laws, this time from outside the United States, primarily in Europe. Here, you're seeing that the U.S. banks are not responding to U.S. regulations, but they're responding to new rules in Europe and in other countries where they have operations.

They're concerned that by having accounts for Americans who reside in those countries, they risk violating some securities rules in those countries. They want to avoid that risk, especially for some of the bigger banks like Merrill Lynch or Morgan Stanley, who have big global operations and investments banking relationships in those countries. They don’t want to put those business lines at risk by having a few retail investment accounts opened for individual Americans residing in those countries

Douglas Goldstein: Wow, it just gets worse and worse. One of the things that I just want to stress for the people who are listening is to realize that it is not illegal for someone who lives outside the United States to open a brokerage account. Do you get the feeling that people believe that they’re just not allowed?

Are People Allowed to Open Brokerage Accounts outside the United States?

David Kuenzi: That's a really common response we get from people. They all say, “Well I was told that I can’t have an account.” Well, the reality is there's absolutely nothing in U.S. rules or any other country’s rules that I know of that says people are not allowed to have accounts in the U.S.

What's happening is the banks are looking at the complexity of the compliance issues when they might choose to have clients who reside in another country. They're simply saying, “Look, it’s not worth it to us. We’re going to have to create all this compliance infrastructure, and do all this reporting.”

Therefore, they choose to simply exclude Americans residing outside the United States from doing banking services here. Or, in Europe, you see a lot of European institutions will reject Americans from opening accounts. It’s not because there's some law that says they have to do that. It’s simply that these banks don’t want to engage in the compliance that is now necessary whenever you provide any kind of financial services to Americans citizens.

Douglas Goldstein: I think it’s not only a business decision, although I would say it probably mostly is. But let’s say a client really is a bad guy—he comes to your office, and it turns out that he was a bad guy and he ends up in jail.

Interestingly, if a client engages in money laundering, the regulators are going to look back at not only you, but they're going to look back at your superiors, at the compliance officers, and everyone who signed off on the wires that this bad guy was sending.

They can actually hold these people criminally liable, and all of a sudden, that same compliance officer in New York is going to say, “Wait a second, I have no idea who this bad guy is. The account sounds reasonable, he sent in a passport, so we okayed it.” But all of a sudden, he’s facing criminal charges.

I fully understand why companies that are not set up for this would not want to be sticking their toe in the water.

David Kuenzi: That’s absolutely true. If you look over the last decade or so, the U.S. has issued hundreds of millions of dollars of fines against big, known banks for not sufficiently enforcing rules that quite honestly, if you go back and look at the time, nobody was really doing, right? But in retrospect, something bad happened, and now you've got to explain what looks like something you should have done that you didn’t do.

Huge fines have been levied, and some individuals have been prosecuted. So the banks, not surprisingly, say, “It’s just not worth it to us to deal with these relatively small number of cross-border clients when we’ve got millions of people in our own country. We don’t have to deal with this.”

The Importance of KYC

Douglas Goldstein: We can be sympathetic to the compliance officers in those big brokerage firms, but the fact is, there are companies like yours and mine that do deal with people who live overseas. The way we do it is we really focus on KYC—know your client. We actually spend the extra time, and no client comes into an office like ours and just fills out a form and opens an account and starts trading.

They have to meet with, or speak to, an advisor and really present who they are. A lot of people overseas, when they left, may have had a 401K or maybe an IRA. Is there any issue that you've come across that’s stopping people overseas from having retirement accounts also?

David Kuenzi: A lot of our clients—as is the case with almost all Americans—acquire their assets in U.S. retirement accounts. In general, it’s not a problem. There are tax issues with these accounts with respect to the local taxation. There are specific rules in various countries around the world, so you have to go around the world on a country-to-country basis and analyze the tax implications of the distributions and things like whether or not a Roth IRA actually works from a tax perspective in that country.

But from the point of view of simply maintaining that account, there's really no country of residence that has ever created a problem for having these accounts. Where you do have problems though, again, are the U.S. institutions—the big 401K providers. For example, Fidelity has, in many countries around the world, told owners of 401Ks residing in those countries that their accounts are frozen.

Again, that's a problem because they're reacting to their own regulatory environment, and the result is that people are saving in accounts that they can’t even close because they're working for these companies. The accounts are effectively frozen, and clients are prevented from moving to another institution where they might be able to manage the assets.

Follow David Kuenzi

Douglas Goldstein: We always try to help clients at least roll their 401K into an IRA. But you're right, it’s not always possible. Hey, David, I see we’re just about out of time. In the last few seconds, tell me, how can people follow you?

David Kuenzi: The best place to find out more about Thun Financial Advisors is to go to our website, www.thunfinancial.com. There you can learn all about our firm and a lot of the research that we publish on these cross-border issues.